XIV. Contingency Rate Adjustments

A. Summary of Proposals

PG&E proposes the adoption of certain mechanisms to adjust rates for changes in costs in 2004 that are driven by external events.

The primary adjustment proposed by PG&E is a Governmental Mechanism that covers cost increases or decreases that are caused by government or regulatory actions in 2004. In the Gas Accord, these contingencies were referred to as z-factors. PG&E's proposed Governmental Mechanism would replace the z-factor adjustment.

The costs covered by the Governmental Mechanism would be limited to those caused by government actions. That means the change must be approved or enacted by the legislature, a regulatory agency, or other governmental entity before any adjustment will be made. Examples of such adjustments include, but are not limited to, changes to federal and state income tax rates, revised pipeline safety regulations, new requirements related to pipeline security, new or revised consumer protection legislation and regulations, and changes in environmental regulations.

The Governmental Mechanism would include the total net adjustment to the annual cost of service resulting from the government action from the date the costs were first incurred through the remainder of 2004. It would cover both capital-related and expense-related costs or credits, including a provision for any changes in franchise fees and uncollectible accounts expense.

PG&E notes that cost contingencies related to events up to December 31, 2003, may not have been included in the 2004 cost of service. If such an event occurred, then PG&E may update its rates to reflect any remaining unrecovered costs, or cost reductions, in the Governmental Mechanism or BCAP.

PG&E proposes that the amount of this cost of service adjustment, up or down, be tracked in a memorandum account with interest, until the change can reflected in rates for 2004. Any potential adjustment resulting from the Governmental Mechanism would be made by advice letter filing directly to the gas transmission and storage rates, with rates effective five business days after filing, subject to refund as described in Chapter 15 of Exhibit 1.

To minimize the effects of the adjustments on 2004 rates, PG&E proposes an annual sharing of the net cumulative balance of cost of service amounts recorded in the memorandum account associated with the Governmental Mechanism. PG&E proposes that the sharing responsibility be as follows: (1) the net 2004 cost or saving balance for the accumulated adjustments of $5 million or less be shared equally between ratepayers and shareholders, after tax; (2) the net 2004 cost or saving balance in excess of $5 million be the responsibility of ratepayers. Under the current z-factor mechanism, if the costs or savings are in the zero to $5 million range, the cost responsibility lies with PG&E. For costs or savings more than $5 million to $10 million, the cost responsibility is shared 50/50. If the costs or savings are more than $10 million, the cost responsibility is 100% that of customers. (73 CPUC2d at 822.)

The second mechanism is the A&G adjustment, which would be a one-time charge made by an advice letter filing directly to gas transmission and storage rates. This adjustment would match the allocated and assigned A&G expenses in the 2004 gas structure with the final amounts from PG&E's 2003 GRC (A.02-11-017), plus escalation to 2004.

PG&E also proposes that the Catastrophic Events Memorandum Account (CEMA) and the Hazardous Substance Mechanism (HSM) remain in effect. The CEMA mechanism covers costs associated with disasters, such as earthquakes and floods, that are catastrophic and out of PG&E's control by their nature. The CEMA was authorized in Resolution E-3238. The HSM is for the clean-up of environmental contamination at PG&E's facilities. The HSM was authorized in D.94-05-020. The costs authorized pursuant to the CEMA and the HSM are recovered through the customer class charge, rather than in PG&E's base rates. Adjustments to the HSM and CEMA will be incorporated in transportation rates in the BCAP or the annual true-up of balancing accounts.

PG&E also states that it may file to adjust rates at other times in 2004 because of increases or decreases in PG&E's costs. PG&E notes that these filings would be subject to Commission approval. Such adjustments could include the following: (1) changes to the capital structure and cost of capital that may result from implementation of a plan of reorganization in PG&E's bankruptcy proceeding; (2) changes to the monthly balancing charge and terms of service, as recommended by the Balancing Forum; and (3) changes to certain aspects of the CAT program that may be recommended by the Core Procurement Advisory Group. PG&E does not propose that these rate adjustments be made subject to the sharing mechanism.

B. Position of the Parties

1. NCGC

NCGC asserts that PG&E's Governmental Mechanism is overly broad, fails to appropriately share costs between ratepayers and shareholders, and is unnecessary for the single year, 2004, covered by this proceeding. NCGC recommends that the Commission reject the proposed Governmental Mechanism.

NCGC contends that the z-factor adjustment that was adopted in the Gas Accord was narrowly drawn. It permits PG&E to adjust Gas Accord rates, but only if: (1) there are extraordinary costs or savings; (2) those extraordinary costs or savings are due to governmental action; and (3) the governmental action results in known changes. (See 73 CPUC2d at 822.) An example in the Gas Accord of a governmental action that could result in a z-factor rate adjustment is "changes to the federal or state income tax rate." (73 CPUC2d at 822.)

NCGC contends that PG&E's proposed Governmental Mechanism does not contain similar restrictions. There is no requirement that the Governmental Mechanism adjustment reflect extraordinary costs. Instead, the proposed mechanism could apply to rate changes that were linked to any governmental action, regardless of whether the impact on PG&E's cost of service was extraordinary or not. Nor is there a requirement that the governmental action must result in "known changes." NCGC contends that the Governmental Mechanism could be applied if there were revised pipeline safety regulations, new requirements related to pipeline security, new or revised consumer protection legislation, and changes in environmental regulations. The cost of these types of governmental actions could be quite uncertain.

NCGC also points out that PG&E's proposed mechanism for sharing the cost of the rate adjustments is far more favorable to shareholders than to ratepayers, as compared to the z-factor sharing mechanism. PG&E has not justified why a sharing formula that is less favorable to ratepayers should be adopted.

PG&E also proposes that it be permitted to apply the Governmental Mechanism to reach back retroactively to the time of the presentation of PG&E's testimony in this case to pick up cost of service changes that might be permitted under the mechanism. If the Governmental Mechanism is adopted, PG&E would be able to adjust its 2004 rates for events that occurred in 2003.

NCGC also contends that since this case involves rates for one year only, and given that PG&E will file a new application for 2005 rates, there is no need for a Governmental Mechanism or any other mechanism that would permit PG&E to adjust rates outside of a rate case for governmental actions of any sort.

2. ORA

ORA contends that there are significant PG&E proposals which impact ratepayers, but ORA could not properly review and assess these proposals in the course of this proceeding. One of these proposals that could significantly impact ratepayers is PG&E's contingency rate adjustments.

3. PG&E

PG&E asserts that NCGC was the only party to take issue in the opening briefs with PG&E's proposed contingency rate adjustments.

PG&E asserts that its proposal to replace the current z-factor mechanism with its proposed contingency rate adjustments is in the public interest and should be adopted. PG&E contends that the pipeline safety regulations are a prime example of why the current z-factor mechanism needs to be replaced with the proposed Governmental Mechanism. Although the pipeline safety regulations are not final, the final regulations will be implemented retroactively. Thus, these draft regulations will require substantial expenditures by PG&E beyond its normally anticipated cost of service. If other safety or security regulations are enacted or proposed that require expenditures by PG&E that are out of its control and unanticipated, PG&E's ratepayers should pay the cost of these regulations because they are part of the cost of providing the services to those customers.

C. Discussion

We have several concerns with PG&E's Governmental Mechanism. First, as described by PG&E, the mechanism would allow PG&E to reach back in 2003 to include costs in its gas transmission and storage rates and charges for 2004. As explained in PG&E's prepared testimony in Exhibit 1 at page 15-4, "If events occur which are not reflected in these costs, then PG&E may update rates to reflect any remaining unrecovered costs, or any cost reductions, under this adjustment...." Under the Governmental Mechanism, PG&E could essentially reopen the 2004 rates for this proceeding by reaching back to 2003 to include costs which PG&E did not originally include in its forecast of expenses. The mechanism opens the door to include significant costs on a retroactive basis.

The second concern with the proposed Governmental Mechanism is that it opens the door for what kind of adjustments could occur. Instead of limiting adjustments to "known changes due to governmental action," as D.97-08-055 requires for the z-factor, adjustments could be made for any change approved or enacted by a government body.

Our third concern with the Governmental Mechanism is that the proposed sharing mechanism is much more favorable to PG&E's shareholders as compared to the z-factor that was agreed to in the Gas Accord. Instead of PG&E absorbing the costs up to $5 million, under PG&E's proposal these costs would be shared 50/50 with ratepayers. If costs exceed $5 million, the costs exceeding $5 million would be the responsibility of ratepayers. Under the z-factor, ratepayers are not responsible for 100% of the costs until the costs are $10 million or more.

The proposed Governmental Mechanism is too broad, opens the door to a myriad of cost adjustments, and shifts these potential costs onto ratepayers. For these reasons, we do not adopt the Governmental Mechanism proposed by PG&E.

The z-factor adjustment of the Gas Accord shall be retained as part of the gas structure that we adopt for 2004 and 2005. We also authorize the continuation of the CEMA and the HSM mechanisms as contingency adjustments to the 2004 and 2005 gas structure.

PG&E mentions the A&G adjustment as a one-time adjustment to replace the A&G placeholder with the A&G expenses adopted in PG&E's GRC. PG&E shall be permitted to make that adjustment through an advice letter filing once the GRC is adopted. PG&E is authorized to establish a memorandum account to track the difference between the A&G expenses authorized in this decision, with the amount adopted in the 2003 GRC, escalated to 2004, plus interest.

PG&E also mentions that it may file to adjust rates at times other than the annual update of its gas structure rates because of increases or decreases in PG&E's costs. PG&E may file these kinds of applications, but it does not mean the Commission will entertain or approve them.